Thursday May 20, 2004 - 21:50:15 GMT
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Yen Rallies As BoJ Pledges To Keep Rates On Hold
Daily Forex Report 05-20-04
· Weaker US Philly Fed Survey and Leading Indicators Report
· UK Retail Sales Increases 0.3% in April, Upward Revision in March
· Japanese Weekly Portfolio Flow Data Indicate Less Foreign Sales of Japanese Equities
The euro is weaker against the dollar ahead of today’s speech by Fed Chairman Alan Greenspan. The losses in the euro were exacerbated by the absence of German, French and Swiss traders who were off for the Ascension Holiday. Although the headline number in the US Philly Fed survey was a disappointment, the improvements in the employment and inflation components provided encouragement for dollar bulls looking for an increasingly hawkish stance from Fed officials. The factory employment component rose to a 31-year high while the prices paid index remained positive for the 10th consecutive month, increasing from 51.9 in April to 59.6. The overall Philly Fed index fell from 32.5 to 23.8 as a result of a fall in the new orders and general activity indices. Expectations continue to remain optimistic with regards to employment and general activity. Essentially, the manufacturing sector continues to expand and executives expect this trend to continue.
US leading indicators increased 0.1% in April and were upwardly revised from 0.3% to 0.8% in March. The strongest gains were seen in the future activity component, which confirms the market’s general view that the worse is over for the US economy. Jobless claims increased from a revised 333k to 345k – despite the gain, the 4 week average fell to a three and half year low of 333.5k. Economists also consider any number below 350k reflective of expansionary conditions. Continuing claims edged lower from 2966k to 2943k. In his speech on gradualism, FOMC member Bernanke sees core inflation remaining low through 2005 and that he expects the “usual gradualist” rate policy and says that the Fed’s “measured” statement is not “unconditional” and will evolve with changing market conditions. This coincides with recent comments by Greenspan, who said that even if the Fed raises rates once, it does not automatically mean that they will follow with a series of hikes. Meanwhile in Switzerland tomorrow, SNB President Roth is scheduled to speak on whether Switzerland is an island in Euroland.” Money supply data will also be released for the month of April. Growth in money supply would be a concern amid a rebounding economy.
UK retail sales increased 0.3% during the month of April, which was right in line with expectations. The overall trend of consumer spending remains strong as sales were upwardly revised from 0.6% to 0.8% in March. Coupled with yesterday’s more hawkish minutes, the futures market is pricing in a higher likelihood of another move in June. Although this is fairly unlikely given that the low level of inflation gives the Bank of England ample flexibility to see how consumers respond to their latest rate hike before tightening monetary policy again. Another round of tightening is practically ensured, which means that the market’s focus will be on the aggressiveness of monetary policy changes.
The Japanese yen extended yesterday’s rally as the MoF’s latest weekly portfolio flow data indicates that foreigners sold less Japanese equities than the market initially anticipated. Japan saw a net outflow of Y1.1trln, which is consistent with seasonal outflows that tend to occur in the beginning of the fiscal year. Aiding in the yen rally are comments from Bank of Japan Governor Fukui who pledges to maintain monetary policy accommodative despite improving growth, to stave off still prevalent deflationary pressures. The BoJ is looking for CPI to stabilize at 0%. The yoy change in the national CPI rate has been in zero to negative territory since August 1999. However Fukui said that even if CPI stabilized at 0%, it does not mean that the BoJ will immediately respond with sharp changes to monetary policy. Meanwhile the BoJ left monetary policy and their assessment of the economy unchanged.
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